RISK ASSESSMENT

Significant decline in growth expected in 2016

Growth is expected to lower in 2016. The agricultural sector would suffer particularly from dry weather triggered by the climatic phenomenon El Niño. Industrial activity, most notably coal production, may feel the benefits of the new rail line linking the mines in the centre of the country with the port of Nacala, commissioned in mid-2015. But the recent disclosure of a huge amount of debt concealed by the government to multilateral institutions, will severely impact direct investments and financial flows. Expected reduction in public capital spending would weigh on the construction sector, traditionally a strong one in the Mozambican economy. Furthermore, the weak external demand and low price of the leading commodities exported by Mozambique (aluminium and coal) would limit export contribution to growth. Finally, consumer demand may be held back by surging inflation, fuelled by the impact of drought on food prices, hike in some public tariffs (specifically electricity) and the effects of the depreciation of the metical.

A worsening of public finances and current account deficit difficult to avoid.

Since the major deterioration in the budget balance recorded in 2014, the government has implemented budget consolidation measures, especially in the framework of the agreement reached with the IMF in October 2015. The outcome of the scandal linked to an undisclosed debt may undermine these efforts as main donors (IMF, World Bank among others) have suspended their financial support, whereas grants account for about 10 % of budget revenues. Nevertheless, the deterioration of the fiscal balance may be limited by measures aimed at extending the tax base and improving tax collection.

The level of public debt (mainly external debt) has increased drastically and conditions of loans, less and less concessional, make the debt repayment burden heavier. The depreciation of the metical against dollar is increasing State debt, more than 80% denominated in foreign currencies. Finally, the government has to deal with its obligations arising from sovereign guarantees granted on the debts of major public companies. Then, the debt relating to the USD 850 MN bond issued by EMATUM, a state-owned fishing company, has been exchanged against state bonds and the additional USD 1.4 bn guaranteed obligations is now included in official debt statistics. Risk on public debt distress is now high.

The structural current account deficit, linked with the country’s huge need for imports of capital goods and services for the construction of its infrastructures (gas, transport) will not be eliminated in 2016. Exports of mining product are not going to increase given the weak growth in external demand and the still low commodity prices. Capital inflows will dwindle due to the loss of investor’s confidence in the ability of the country to deal with its substantial indebtedness.

Then, the downward pressures on the metical are likely to continue and the depreciation against the dollar in 2016 may be as high as in 2015 (30 %) while foreign exchange reserves have declined to barely USD 2 bn (around 2 months of import).

A continuing fragile political situation and weaknesses in governance

Frelimo has led the country since independence (1975). Its representative, Filipe Nyussi, has been President since January 2015, after he won the elections in October 2014. Tensions with Renamo, the leading opposition party which fought against Frelimo during the civil war, are mounting. The social situation is also unsettled as a result of growing discontent among the population with the slow pace of progress in terms of the fight against poverty and reducing unemployment, alongside continuing political uncertainties that are off-putting for foreign investors.

The business climate in Mozambique remains difficult. Its performances as measured by the World Bank’s governance indicators are generally below those of its neighbours (with the exception of Zimbabwe). The country has dropped down the classifications, most notably for its control of corruption (151st out of 215 countries in 2014 compared with 124th in 2010), rule of law (164th compared with 129th) and above all political stability (down 49 places since 2010 to 141st place in 2014).